No, You Go First – The Primacy of Coverage Issue

You hire a subcontractor to work on a new project. You’ve required the sub to sign a contract, holding you harmless and indemnifying you for bodily injury and property damage claims. You’ve also required that the subcontractor carry a $1,000,000 Commercial General Liability (CGL) Policy and a $5,000,000 Umbrella, and that the sub include you as additional insured on both policies. After a serious accident at the jobsite, you try to submit the claim against you to the sub’s insurer and leave your own insurance policies untouched.

The sub’s carrier tells you that you have coverage under the sub’s CGL, but that your own CGL must respond before the sub’s Umbrella pays anything. Surely this can’t be right?!

The problem could be the Other Insurance clauses in your policies. If your and the sub’s policies are written using industry standard forms, the sub’s CGL will pay first and your own CGL second. But what if the claim is a large one, involving the Umbrella limits? Most Umbrellas say they provide excess coverage. Your CGL includes language making itself excess of other primary coverage, such as the sub’s CGL. The sub’s Umbrella, though, isn’t primary coverage.

Depending on the jurisdiction, a horizontal exhaustion of limits approach could be taken, meaning that all layers of primary coverage, namely your and your sub’s CGL policies, need to be exhausted before any Umbrella is required to pay. Your CGL policy could be forced to pay, and then you’ll need to file suit against the sub who has agreed to hold you harmless and indemnify you. Ultimately, your CGL carrier could be reimbursed, but in the meantime, this loss is on your experience and affecting your insurance premiums.

It’s also possible that your sub’s additional insured endorsement isn’t an industry standard form; it could state that it provides excess coverage for additional insureds. Other non-standard forms give primary coverage, but only if a contract specifically requires coverage on a primary basis.

The best way to ensure that all layers of a subcontractor’s coverage are exhausted before your own policies are called upon to pay a claim, is to include in the contract a requirement for additional insured coverage that is primary and non-contributory. This requirement should apply not just to the CGL, but to the Umbrella, too.

In addition, you should review your sub’s additional insured endorsement to make certain that coverage for you, as additional insured, applies on a primary basis. It is a good idea to request such an endorsement on the sub’s Umbrella as well as on the CGL. While not all Umbrella carriers will offer this feature, more are starting to.

Making sure that your contract and your subcontractor’s insurance policies are clear that the sub’s policies will pay before your own is an important step. It is the only way to be sure that your policies won’t have to pay claims that should be handled by your sub’s insurance company.